RSK.IQ Question of the Week 6/11/18

Beneficial Ownership Rule and Estate Accounts


A New Jersey bank asks whether estate accounts are subject to the Beneficial Ownership Rule.

Response Summary

Estate accounts are excluded from the Beneficial Ownership Rule, since the Rule does not cover accounts opened by court-appointed representatives of the deceased’s estate.

Response Detail

Under the Beneficial Ownership Rule, financial institutions must establish procedures to:

  • Identify each natural person who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer
  • Identify one natural person with significant responsibility to control, manage, or direct a legal entity customer
  • Verify the identities of those persons according to risk-based procedures, which, at a minimum, must include the elements currently required under the Customer Identification Procedure (“CIP”) rules.

Legal entity customers include corporations, limited liability companies, partnerships, or similar business entities. FinCEN interprets this to include all entities that are formed by a filing with the Secretary of State (or similar office), as well as general partnerships.  There are exemptions for legal entity customers such as federally-regulated financial institutions, publicly held companies traded on certain U.S. stock exchanges, domestic government agencies, SEC-registered investment companies, and a charity or non-profit entity that has not been denied tax exempt status. 81 Federal Register 29397, 29412.

When the Final Rule was published, FinCEN noted that there are many types of trusts, and that while some would fit within the definition of a legal entity (e.g., statutory trusts), most would not. Unlike the legal entity customers that are subject to the beneficial ownership requirement, a trust is usually a contractual arrangement between the person who provides the funds and specifies the trust terms (i.e., the settlor or grantor) and the person with control over the funds (i.e., the trustee) for the benefit of those who benefit from the trust (i.e., the beneficiaries). This arrangement does not generally require the approval by or other action of a state to become effective. 81 Federal Register 29397, 29412.

FinCEN concluded that identifying a “beneficial owner” among the parties to such an arrangement for anti-money laundering purposes would not be practical, based on the definition of a beneficial owner. Thus, FinCEN declined to impose the Beneficial Ownership Rule on non-statutory trusts. 81 Federal Register 29397, 29412.

In a footnote to the Rule as it is applied to trusts, FinCEN noted the following:

Also not covered by the final rule are accounts opened by a court-appointed representative of the deceased’s estate. 81 Federal Register, 29397, 29412, footnote 58.

Under New Jersey law, the representative of the estate of a deceased person is the executor or administrator, who is appointed by a probate court and granted letters testamentary or letters of administration, granting the representative the authority to open accounts for the estate. N.J.S.A. 3B:3-17, 10-1. As such, accounts opened by an executor or administrator would not be subject to the Beneficial Ownership Rule.

This entry was posted on Monday, June 11th, 2018 at 6:00 am.

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